Stay the Course As Mixed Signals Move Markets

Traders stampeded out of gold, emerging markets and bonds this month, setting
record monthly outflows in June. Ever since the Federal Reserve hinted in
May that signs of a stronger economy could allow for a slowdown of stimulus,
markets have protested the news.

Gold has been hit hard by the tapering talk and resultant rising interest
rates and liquidity drain, falling below $1,200 last week for the first time
since August 2010. We're also seeing India, the world's biggest gold buyer,
trying to stifle gold demand. As the government seeks to reduce its record
current account deficit, it has hiked import tariffs on gold to 8 percent
and introduced new constraints on rural lending against gold jewelry and coins.
Ross Norman, CEO of bullion broker Sharps Pixley, said, "It's almost as if
the finance ministry is waging war on the gold sector, which would suggest
that they feel they have lost control of the economy to some extent. In that
environment, you would want to own gold more than ever."

Other factors fueling the liquidation were the raising of margin requirements
on gold by the CME Group, the largest operator of futures exchanges in the
U.S., and global liquidity concerns in the U.S. and China. When the country
with the largest GDP in the world and the country with the largest population
on earth have liquidity concerns, traders run from stocks, bonds and gold
and head to cash. Even though gold traders have pulled out of their financial
investments, there has been a surge in physical gold buying and central bankers
have maintained their positions.

We maintain that gold is in extremely oversold territory and mathematically
due for a reversal toward the mean. Yet when gold prices plummet, fear takes
over and some investors forget the fundamental reasons to own gold: Gold is
a portfolio diversifier and a store of value. It is a finite resource with
increasing global demand. I co-authored a book on gold five years ago based
on a lifetime of experience with the metal. My advice hasn't changed since
then. When it comes to gold, moderation is key. Don't try to get rich with
gold because the corresponding risk is simply too high. Limit your exposure
to gold as an asset class to 10 percent of your portfolio -- no more than
5 percent in bullion and 5 percent in equities. Rebalance each year to keep
that level of exposure and use volatility to your advantage.

There seems to be an inherent emotional bias against gold by many in the financial
media and among money managers, especially after gold corrects. Billions of
dollars lost in gold make for sensational headlines, yet two darling technology
stocks have also taken it on the chin. I find it interesting that the naysayers
aren't talking about the fact that Facebook and Apple have caused more destruction
in market capitalization over the past year than the biggest gold ETF. The
chart below puts the magnitude of decline in context.

Why is it that gold still struggles for acceptance as a permanent asset class?
I, too, enjoy catching up with Facebook friends on my iPad, but I have more
faith that millions of people in Asia and the Middle East will continue to
adore the precious metal long after the novelty of Facebook and iPads wears
off.

In many parts of the world, this deep cultural affinity for gold is expressed
through the giving of gold coins and jewelry for momentous occasions. Gold
will soon be entering its historical period of seasonal strength with Ramadan
beginning in July, followed by the Indian Festival of Lights, wedding season
and Christmas. We have often published on the impact of this powerful seasonal
pattern.

In addition to spooking the gold market, the likelihood of the Fed ending
its easing also had investors fleeing fixed income investments. Rising interest
rates and falling prices led to June bond fund outflows shattering the previous
record set in October 2008. Yet downward revisions of economic data suggested
that while the economy may be steadily improving, there aren't yet signs of
spectacular growth. In response, bond yields retreated by the end of last
week. We see the exodus as an entry point for investors who may have been
nervous about getting into the bond market.

Fed fears reached far and wide as emerging market equities also experienced
record outflows this month as the sell-off extended to Latin America, Europe
and Asia. Renewed worries over Chinese growth and concerns with tightening
financial conditions accelerated the flight from emerging markets. Money that
had been made in recently hot markets was pulled out, further drying up liquidity.
We continue to see opportunity in emerging markets, where we seek out undervalued
dividend-paying companies with growth prospects.

From time to time, in bull markets and bear markets, prices and fundamentals
disconnect. Prices can swing too far on fear and rise too fast on greed. We
believe fundamentals remain solid and much of the short-term swings are much
ado about nothing. In volatile markets, it is important to trust your investment
processes and asset allocation disciplines.

All opinions expressed and data provided are subject to change
without notice. Some of these opinions may not be appropriate to every investor.
Diversification does not protect an investor from market risks and does not
assure a profit. The following securities mentioned in the commentary were
held by one or more of U.S. Global Investors Funds as of 03/31/2013: Apple,
SPDR Gold Shares (GLD)

Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
expenses. For this and other important information, obtain a fund prospectus
by visiting www.usfunds.com or by calling
1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.